Published on Gold Anti-Trust Action Committee (http://www.gata.org)

How the ordinary gold advocate can beat the big guys

By cpowell
Created 2002-07-28 07:00

9:11p ET Sunday, July 27, 2002

Dear Friend of GATA and Gold:

Our friends at Au Capital in Bethesda,
Maryland, have graciously allowed us to share
with you their latest report to their
investors because it includes insights that
tend to confirm what you've been hearing from
GATA Chairman Bill Murphy and GATA's brain
trust. The Au Capital report may be most
notable for indicating that the spotlight in
the gold market is shining increasingly on
J.P. Morgan Chase, that Morgan Chase's behavior
in the market has become brazen, and that it is
being noticed.

Of course the more Morgan Chase's behavior
is noticed, the more difficulty the firm may
encounter in its manipulation of the gold

The Au Capital report is appended here, minus a
chart that won't reproduce well in e-mail.

CHRIS POWELL, Secretary/Treasurer Gold Anti-
Trust Action Committee Inc.

* * *

Au Capital, LP
Bethesda, Maryland

July 27, 2002

To Our Limited Partners:

Our capital gained 27.1 percent in the second
quarter and 89.3 percent in the first half.
We beat our benchmarks rather dramatically,
even as we maintained a cash balance on the
order of 20 percent of capital. Our quarterly
and longer-term returns to June 30, 2002, are
shown below, and your individual account
statement and partnership financial
statements for the latest periods are

These longer-term data demonstrate three
important points.

First, you already know that we have
outperformed our peers and benchmarks
steadily and substantially over the years,
earning more on the uplegs and losing less on
the downside, but you may not know how
substantial the cumulative effect has come to
be. A $10,000 investment in Au Capital grew
to $22,393 at a rate of 8.9 percent
compounded annually from inception at the
start of 1993 to the middle of 2002. A
comparable investment in the gold-oriented
funds tracked by Lipper grew to just $13,048
at a 2.8 percent compound annual rate.

Second, we virtually matched the longer-term
return of the S&P 500 index of the largest
stocks in a period that included the greatest
equity price inflation in history and what we
believe is only the first phase of its
collapse. The difference is just $324 on a
$10,000 investment over nearly 10 years. (The
Au Capital return is net to limited partners,
of course, while the S&P index excludes
management costs, commissions, and dividends.)

Third, since the price of gold bullion
declined slightly in the period and the
leading index of gold mining shares was
unchanged, our returns clearly did not
benefit from any general revaluation of our
sector. We simply maintained our long-term
call on the price of gold as a hedge against
systemic risk to the values of financial
assets, and made some money for our trouble.
The objective of Au Capital was to maintain
the hedge at little or no cost, and we more
than met it.

Volatility within the period was substantial,
occasionally severe; our performance, as
expected, generally leaned against that of
the broader markets for financial assets,
especially in the mini-crises during which
markets actively considered systemic risk.

Volatility has increased again of late,
beginning with a $10 decline in bullion
prices on the last trading day of June. Our
portfolio has declined about 20 percent in
July to date. That single-day crack in bullion
prices has recurred twice since, bringing the
spot price back to $300 per ounce currently
and threatening to retest much of the recent
rise from the $270s.

As we wrote last time, shares had grown rich
relative to bullion, discounting $350 per
ounce, so we have been expecting a
significant decline in share prices. It has
surprised us, however, to see the metal price
itself decline severely as the broader markets
edged toward panic. Metal prices lately had
risen as stock prices weakened; with equity
markets threatening to crack during much of
July, we would have expected stronger reports
from gold bullion.

Further, the bullion-selling pattern looks in
many ways like market intervention by a large,
unidentified seller, and it is difficult to
imagine why anyone who was motivated to
accumulate a large, long gold position in the
first place would be choosing to sell
aggressively under the recently prevailing

The first "intervention" came in the last hours
of the last trading day of June, which was
mark-to-market day for the official reports of
banks and others with large gold derivative
positions. This feeds long-standing suspicions
that J.P. Morgan Chase and/or other bullion
bankers are massively short gold, as we have
explained previously, and that they must, and
are trying to, break the gold market to avoid
unmanageably large losses.

We remain agnostic as to cause, but agree
that the selling pattern is truly strange.

In general, although patience and a tolerance
for volatility will continue to be required,
the underlying strength in the fundamentals
of gold and the fragility of the financial
system as a whole are both conducive to our
further success over time.

With every good wish,

Hans H. Kahn and Daniel Tessler
Au Capital, L.P.
4938 Hampden Lane
Suite 337
Bethesda, Maryland 20814
digitaldaniel@msn.com [1]

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